What is FPO?
A Follow-on Public Offer (FPO) is a process where an already listed company on a stock exchange issues more shares to the public. Companies usually issue FPOs to raise additional capital through new share offerings. Moreover, this procedure helps in enhancing the equity base of firms and capturing more investors. Additionally, it is common for firms to use FPOs to finance their development programs or become financially stronger. Furthermore, the Securities and Exchange Board of India (SEBI) regulates FPOs in India, ensuring that the companies are upright and act with the protection of the investors’ interest. In this blog, we will discuss what FPO means, its working, types, pros and cons, and the difference between FPO and IPO.
Key Highlights
- An FPO (follow-on public offering) is a type of financial structure whereby an already listed company issues more shares to the market to generate additional funds. It assists in business expansion, debt repayment, and other monetary requirements.
- There are two types of FPOs; Dilutive which introduces new shares possibly decreasing the value of currently existing shares and Non-dilutive where old-time shareholders sell off their portions without altering the number of outstanding securities held by those individuals.
- FPOs provide opportunities for companies to secure more resources, enhance liquidity in their markets, bring in new investors, and positively influence general perceptions about them in their respective industries.
- The fact that FPOs can dilute ownership stakes among existing stockholders may lead to lower stock prices. Additionally, increased scrutiny from regulatory agencies as well as competition for profits among shareholders at large.
Table of Contents
FPO Meaning
An FPO refers to a situation wherein an already-listed company (post its IPO) issues certain shares to the general public or existing shareholders to generate more revenue. FPOs are used by companies to meet various needs such as business expansion, debt repayment, launching of new initiatives, and investment in other entities.
How does Follow-on Public Offer Work?
An FPO is a method where firms can increase their funding through new public share offerings. To accomplish this, they go through various stages. Let’s discuss the stages in brief:
Appoint Intermediaries
Investment banks and underwriters are hired by the company to assist in the FPO.
Prepare Offer Document
The company prepares a document that contains details of the FPO, including its size and price, and sends it to the Securities and Exchange Board of India (SEBI) for approval.
Set Pricing
The company sets the share price for the FPO after SEBI approves the offer document. Investors apply for shares at this price.
Open and Close
For a specified period, the company opens the FPO to allow investors to submit their bids; the bidding period ends with the closure of the FPO.
Allotment and Listing
Shares are allocated by the company to those who applied for them, and thereafter they are listed on stock exchanges.
Types of FPO
There are two types of follow-on public offers (FPO), based on the different objectives they fulfill and their distinct effects on both the company and its shareholders. So, let’s discuss the two types of FPO in brief:
Dilutive FPO
In a dilutive FPO, the firm releases additional stocks and the rate of each stock remains constant. This could result in a decline in earnings per share and hence a drop in share price. Moreover, the company’s board provides the public with these new shares to reduce debts or get extra funds.
Non-Dilutive FPO
In a non-dilutive Follow-On Public Offering (FPO), existing shareholders, including private investors, sell their shares to the public. In this scenario, the cash received from the sale goes to the shareholders rather than the company. Consequently, these FPOs do not affect the company’s earnings per share.
Example of FPO
The Indian stock market history has seen many Follow-On Public Offerings (FPOs). Some noteworthy examples include the FPOs from Power Finance Corporation (PFC) Limited, Tata Steel Limited, Power Grid Corporation of India, and ITI Limited.
However, not every FPO is successful at all. For instance, some firms found it hard to attract a sufficient number of investors hence failing in their FPOs. Whereas, others recorded a drastic decline in their stock prices which never returned to the initial levels after the event occurred.
FPO Vs IPO
Initial Public Offers (IPO) and Follow-on Public Offers (FPO) are a function of selling shares to the general public. However, there is a difference in the time at which they do so regarding the lifetime of an organisation. So, here’s a comparison table that will help you get a clear idea about the differences between IPO and FPO:
| Aspect | IPO | FPO |
| Meaning | The first sale of stock by a private company to the public | Additional issuance of shares by a public company after the IPO |
| Purpose | Raises capital for the company’s expansion, debt repayment, or other business needs | Raises additional capital for the company’s expansion, acquisitions or to meet financial obligations |
| Type of Company | Usually involves privately held companies that want to avail public ownership | Those companies that have already been public |
| Dilution of Ownership | Generally results in dilution for existing shareholders as new shares are issued | May dilute existing shareholders’ ownership, though not as significantly as in an IPO |
| Market Perception | Considered riskier by investors due to limited historical financial data and uncertainty about future performance | Generally perceived as less risky since it is already established in the public market |
| Timing | This can occur at any stage of a company’s growth, typically when there is a significant funding requirement for expansion | Usually happens once a company has been listed for some years and needs more money for various purposes |
| Prospectus | A detailed prospectus outlining the company’s business model, financials, risks, and management team is required | Not always required, companies may choose to provide supplemental information to investors. |
Advantages of FPO
Exploring the advantages of Follow-On Public Offers (FPOs) reveals how these alternatives can be useful to companies and investors in different ways. So, let’s discuss the benefits of FPO in brief:
Raising Capital
Through an FPO, firms raise additional funds to settle their debts or increase growth opportunities.
Increased Liquidity
An FPO increases the number of shares in circulation, making it easier for investors to buy and sell a company’s shares.
Diversification
An FPO aids companies in attracting new investors and distributing their ownership among more individuals.
Better Market Reputation
A well-executed FPO can enhance a company’s image by indicating that investors have trust in its expansion and strength of finances.
Disadvantages of an FPO
Now that you know the advantages of an FPO, here are some disadvantages of it. Let’s discuss the same in brief:
Dilution of Ownership
Existing shareholders will find that with an FPO, they have a smaller part of the company than before the FPO.
Drop in Price
Share prices may drop after an FPO, especially if some investors find the price of new shares is expensive.
Increased Competition
Increased shares mean more shares are competing for a company’s profits, and consequently, this means lower earnings per share for existing shareholders.
Increased Regulatory Scrutiny
When a company makes an FPO or follow-on public offering, it gets more attention from regulators who often charge them extra fees because of it.
Conclusion
The FPO is a key financing tool that helps companies already listed on a stock exchange raise additional funds. The company issues new shares to the public or current shareholders to finance their financial objectives, like business expansion plans, repayment of earlier loans, or financing new projects. Moreover, they are categorised as dilutive or non-dilutive FPOs, affecting shareholders in different ways. They are associated with various advantages, such as increasing capital and market liquidity. However, the disadvantages of their issue include the dilution of share value. Therefore, understanding FPOs and how they differ from IPOs is important in making informed investment decisions.
FAQs on FPO
IPOs and FPOs are used by public companies or companies that tend to go public.
Non-dilutive FPO refers to the process by which a company sells its private shares to the public and in this process, the funds transfer to the individual rather than the company.
FPO is one of the idle ways for a company to raise funds where investors can buy shares at competitive prices.
Investors with a Demat account can invest in FPOs, including non-institutional investors like NRIs, HUFs, and trusts.